Journal of Business Economics and Management

ISSN 1611-1699 print / ISSN 2029-4433 online

2011 Volume 12(2): 375399
doi:10.3846/16111699.2011.576749

AN EMPIRICAL STUDY OF FACTORS AFFECTING

ELECTRONIC COMMERCE ADOPTION
AMONG SMEs IN MALAYSIA
Syed Shah Alam1, Md. Yunus Ali2, Mohd. Fauzi Mohd. Jani3
1Faculty

of Economics and Management, Universiti Kebangsaan Malaysia,

UKM Bangi, Selangor, Malaysia
2School of Business, Monash University Malaysia
3Center for Entrepreneurship and SMEs Development (CESMED),
Universiti Kebangsaan Malaysia, UKM Bangi, Selangor, Malaysia
E-mails: 1shahalam@ukm.my (corresponding author);
2yunus.ali@buseco.monash.edu.my; 3mdfau@ukm.my
Received 21 June 2010; accepted 10 Januar 2011

Abstract. This study empirically examines determinants of E-commerce adoption by Malaysian Small and Medium-sized Enterprises. Research model for this study was drawn
on the literature on information and communication technology, Information system, and
electronic data interchange. This study tested seven hypotheses on factors that inuence
e-commerce adoption with empirical data from a sample of 200 SMEs in Malaysia. The
ndings show that relative advantage, compatibility, organizational readiness, managers
characteristics, and security have signicant impact on e-commerce adoption. The study
provides a clear understanding of managers perception about e-commerce adoption in
their businesses. This study is important in a global context, as SMEs in Malaysia are
going for exporting their product in the global marketplace.
Keywords: e-commerce, SMEs, Relative advantage, Malaysia.
Reference to this paper should be made as follows: Alam, S. S.; Ali, M. Y.; Jani, M. F. M.
2011. An empirical study of factors affecting electronic commerce adoption among SMEs
in Malaysia, Journal of Business Economics and Management 12(2): 375399.
JEL classication: M15: IT Management.

1. Introduction
Most of the recent researches in Malaysia on electronic commerce (EC) have focused
on the Business-to-Consumer segment of e-commerce activity (Khairul and Ahmad
2005; Khatibi et al. 2003; Jawahita 2004). This is understandable because the household
Internet penetration rate has increased signicantly in recent years. A recent statistics
shows that the average growth rate of internet penetration in the country between 2000
and 2009 was 356.8 percent per year (Internetworldstats.com 2010) and in 2009 total
Internet users were 65.7 percent that contributed to a total 16,902,600 Internet users.
However, greater potential in business e-commerce have encouraged companies to move
Copyright 2011 Vilnius Gediminas Technical University (VGTU) Press Technika
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S. S. Alam et al. An empirical study of factors affecting electronic commerce adoption among SMEs in Malaysia

from traditional method to the online business worldwide. Thompson and Ranganathan
(2004) argued that companies have much greater incentive to adopt e-commerce than
consumers because it offered many benets to companies such as massive cost saving
in transaction costs, improved efciency and strategic exibility by developing more
dynamic and exible relationships with key business partners.
E-commerce researchers reported tremendous growth in e-commerce all over the globe
due to the enormous volume of goods and services traded between rms (Laudon and
Traver 2001; Garicano and Kaplan 2001). IDC reported that worldwide, more than 624
million Internet users expected to make online purchases in 2009, totaling nearly $8
trillion (both business to business and business to consumer). By 2013, worldwide ecommerce transactions will be worth more than $16 trillion (IDC 2010).
Due to the global reach of e-commerce, Small and Medium-sized Enterprises (SMEs)
in the developed countries have started adopting e-commerce in their businesses (Rao
and Metts 2003); but SMEs in Malaysian and many other developing countries are still
reluctant to use information technology or e-commerce in their day-to-day business
operation. According to Statistics of SMI (Small and Medium Scale Industries) Association of Malaysia, only 30 per cent of the SMEs in Malaysia have a web presence
and use IT on a daily basis (Hussin and Noor 2005). Therefore, it is thus important to
identify the factors that inuence e-commerce adoption among SMEs in Malaysia. In
addition, understanding factors affecting e-commerce adoption help managers of SMEs
to predict e-commerce usage rate and evaluate the future growth of e-commerce. Most
researche have been concentrated on the e-commerce adoption in the world. However,
there is still a need for closer examination on the e-commerce adoption rate in specic
countries. Still there is a big research gap exists, especially between the developed and
developing countries, which may differ signicantly between countries (Licker and
Motts 2000; Spanos et al. 2002) that limit the generalization of research results from
developed countries to developing country contexts (Dewan and Kraemer 2000). According to Shore (1998) and Stiglitz (1998) implementation of information system depend on specic social, cultural, economic, legal and political context, which may differ
signicantly from one country to another country. Dewan and Kraemer (2000) argued
in their study that ndings from developed countries were not directly transferable to
developing countries. Thus, this research is needed for non-transferability of ndings
from research in developed countries and also for the improvement of understanding of
the determinants of e-commerce adoption in developing countries.
The rest of the paper is organized as follows: rstly identify the relationship between
some important factors and intent to adopt e-commerce and secondly, analysis the factors that inuence intent to adopt e-commerce among SMEs in Malaysia.

2. Problem statement and objective

According to the speech in the Wall Street Journal by Jerry Jasinowski, President of the
US National Association of Manufacturers warned his fellow members by saying small
rms need to get in the e-commerce game or they are going to be shut out of a critical
part of the marketplace (Lomerson et al. 2004). This might have encouraged some
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SMEs in the USA and other developed nations but the rate of e-commerce adoption
in developing nation is rather slow. While there have been some empirical studies on
e-commerce adoption in the developed country like Canada and Australia (MacGregor
and Vrazalic 2004; Sparling and Toleman 2007), similar attempts on e-commerce adoption have been more limited, particularly the developing country like Malaysia. Despite
wide media coverage of the potential growth of e-commerce in the Asia Pacic region,
little research so far examined its adoption in businesses, and the factors inuencing the
adoption intention (Wirtz and Kam 2001). Looking at the current scenario, the purpose
of this study is to examine the major determinants of e-commerce adoption by SMEs
in Malaysia. The broad research question is: What factors determine the likelihood of
adoption of e-commerce in Malaysian SMEs? The research question is concerned with
understanding the factors that encourage or discourage SMEs adoption of e-commerce.
Information systems implementation depends on specic social, cultural, economic,
legal and political contexts, which may differ signicantly between countries (Spanos
et al. 2002) that limit the generalization of research results from developed countries
to developing country contexts (Dewan and Kraemer 2000). This justies an empirical
investigation of Malaysian SME managers awareness, perception and organizational
readiness or concerns about their current and potential use of e-commerce to uncover
the factors that encourage or deter e-commerce adoption. Moreover, this will contribute to conrm past ndings of a limited research attempts in developing country context (Molla and Licker 2005a, 2005b) and possible generalization on the adoption of
e-commerce (Spanos et al. 2002).

3. The Conceptual Framework for this study

It is argued that diffusion of innovation is relevant to the study of Electronic commerce,
and that e-commerce has unique features suggesting that e-commerce needs its own
specic study (Chong 2006). E-commerce has technical components, similar to other
IT innovations, but it also has interorganisational elements which distinguish it from
other types of innovations. Technology adoption and diffusion have been the topic of
many researches (Rogers 1995; Davis 1993, 1989; Tornatzky and Klein 1982; Bajaj and
Nidumolu 1998; Igbaria et al. 1997). In communication literature, diffusion is dened
as the process by which an innovation is communicated through certain channels over
time among members of a social system (Rogers 1995: 171). The diffusion of innovation theory stresses the role of social networks among potential adopters. It seeks to
describe, explain and predict the adoption behavior of a specic group.
Rogers Innovation diffusion theory is widely accepted model among researchers in the
social science (Shen et al. 2004; Skoko et al. 2006; Alam et al. 2007; Premkumar and
Roberts 1999). Rogrs has identied ve factors which serve to inuence the adoption
rate of innovations by organizations. These factors include (i) relative advantage (the
degree to which an innovation is perceived as being better than the idea it supersedes);
(ii) compatibility (the degree to which an innovation is perceived as consistent with
the existing values, past experiences, and needs of potential adopters); (iii) complexity
(the degree to which an innovation is perceived as relatively difcult to understand and
377

S. S. Alam et al. An empirical study of factors affecting electronic commerce adoption among SMEs in Malaysia

use); (iv) trialability (the degree to which an innovation may be experimented with on
a limited basis); and (v) observability (the degree to which the results of an innovation
are visible to others).
Like innovation and diffusion theory, another model has been used as the basic theory
of adoption of technological products and services is TAM (Davis 1989). The popularity of the Internet has generated large number of research on TAM. The TAM model
was also used to study a variety of Internet technologies, such as the World Wide Web
(Lederer et al. 2000; van der Heijden 2003), intranet (Alam 2009; Yang 2005; Horton
et al. 2001), electronic commerce adoption (Slyke et al. 2005; Lee et al. 2001; Olson
and Boyer 2003), because it was originally developed to study computer-based technologies (Yang 2005). Furthermore, it has been extended its application to diverse types
of IS, such as personal computing (Agarwal and Prasad 1999), and some other software
(Venkatesh 1999; Venkatesh and Davis 2000). The TAM model focuses on the attitudinal explanations of intention to use a specic technology or service. TAM predicts user
acceptance based on ve specic behavioral beliefs. First of these beliefs is perceive
ease of use (PEU), which is dened as the degree to which a person believes that using a particular system would be free of effort (van der Heijden 2003). The second
belief is perceived usefulness (PU), which is dened as the degree to which a person
believes using a particular system would enhance his or her job performance (van der
Heijden 2003: 542). Other key components in the model include attitude toward using
(AT), behavioural intention to use (BI), and actual use (AU) (Legris et al. 2003).
Attitude toward using (AT) is determined by users PU and PEOU in information
technology use (OCass and Fenench 2003).
The Rogers and Davis models are complementary, and both are widely supported in the
empirical research and follow up the research. Daviss two basic theoretical constructs
are very similar within the Rogers model. Specically, usefulness is similar to Rogers
factor of relative advantage and ease of use is similar to Rogers factor of complexity
(Roberts 2004; Agarwal and Prasad 1997; Chong 2006).
Researchers also identied several other factors that inuence the adoption of IT in the
SMEs. Among these are the cost of technology (Alam 2009; Chong 2006; Saunders and
Clark 1992; Cragg and King 1993; Iacovou et al. 1995), external pressure (Fink and Kazakoff 1997; Hart and Saunders 1994), owner-managers characteristics (van Akkeren
and Cavaye 1999) and security (Limthongchai and Speece 2003; Kendall et al. 2001) .
In studies of technology adoption in SMEs, researchers have emphasizes on the owners/managers of SMEs especially their characteristics, behaviours and attitudes (Thong
1999; Damanpour 1991; Fichman and Kemerer 1997). This is because of such individuals usually directly and/or indirectly involved in all decision making in their organization. Lakhanpal (1994) reveals that individual characteristics i.e., innovators, leaders
and other individual attributes in key positions have signicant impacts on explaining
differences in the degree of innovation adoption. Therefore, these factors are worthy to
be used to explain the adoption patterns of EC by SMEs in Malaysia.
The cost of adoption and maintenance of system is indeed an important factor for SMEs.
No SME will be interested to adopt E-commerce or ICT unless the benets outweigh
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the costs of developing and maintaining the system (Vatanasakdakul et al. 2004). They
argue that SMEs are generally concerned about the costs of establishing and maintaining e-commerce since they generally suffer from budget constraints and are less sure of
the expected returns on the investment. Indeed, SMEs, especially those that outsource
Web page design and updating, have found it difcult to contain site development costs
which are more or less beyond the rms control (Ernst and Young 2001)
Indeed, this study is focused on the adoption and utilization of the Internet in developing
countries which is greatly beneted from the research model of adoption of information
technology in small business (Hazbo et al. 2006; Ratnasingham 1997; Premkumar and
Roberts 1999; Thong and Yap 1996).

4. Research Model and Hypotheses of this Study

By drawing on the two major diffusion models discussed above and recent technological
literature, an integrated model of e-commerce adoption in Malaysian SMEs is developed. The theoretical framework combines the Rogers and Davis models and adds the
factors of cost, external pressure and owner-managers characteristics as other likely
explanatory factors (see Fig. 1).
Relative Advantage
Compatibility
Perceived Ease of Use
Organizational Readiness

E-Commerce adoption

Security
Perceived Cost
Managers Characteristics

Fig. 1. Research Model

On the basis of existing literature, a one stage normative model was developed which
provides the basis of research objectives. This model, depicted in Figure 1, relates the
independent and dependent variables without any intervening variables. In lieu of causal
relationship, the model is shown as assertive in nature. The model consists of seven
variables that we posit to have an effect on adoption of e-commerce. Each of the variables is discussed below:
4.1. Relative Advantage
Relative advantage is viewed as an advantage for an organization over previous ways
of performing the same task (Agarwal and Prasad 1997). Relative advantage has been
found to be one of the best predictors and positively related to an innovations rate of
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adoption (Premkumar et al. 1994; Rogers 1995; Tan and Teo 2000; Alam et al. 2007). In
view of the advantages that e-commerce offer, it would thus be expected that companies
who perceived e-commerce as advantageous would likely to adopt the e-commerce.
This leads to the rst hypothesis:
Hypothesis 1: SMEs with greater perceived advantages from the implementation of
e-commerce are more likely to pursue its adoption.
4.2. Compatibility
Tornatzky and Klein (1982) found that an innovation is more likely to be adopted
when it is compatible with individuals job responsibility and value system. It will
be adopted not only if it is compatible with deeply held cultural values but also if it
is compatible with previous ideas. Compatibility of the innovation with a preceding
idea can either speed up or retard its rate of adoption in the organization. The degree
to which innovation meets client needs is another dimension of compatibility of an innovation. Organization should seek to determine the needs of their customers, and then
recommend innovations that fulll these needs. When felt needs is met, a faster rate of
adoption usually occurs (Rogers 1995). When an innovation is viewed irrelevant to its
needs, but it seems technically and nancially better quality in accomplishing a given
task, it may not be adopted (Rogers 1995). If e-commerce is perceived as compatible
with the organizations total business procedures, the organisation will be more likely
adopt it. Thus, the hypothesis is:
Hypothesis 2: Perceived compatibility will have a positive effect on implementation of
e-commerce by Malaysian SMEs.
4.3. Perceived Ease of Use
Information systems that user perceive easier to use in their business and less complex
to increase the likelihood of its adoption and usage (Lee et al. 2001; Tan and Teo 2000).
According to TAM perceived ease of use (PEOU) is a major factor that affects acceptance of information system (Davis et al. 1989). PEOU is dened as the degree to which
a person believes that using a particular system would be free of effort (Davis 1989).
If the appropriate skills and understanding of the technology are in place then the use
of e-commerce will be easier thus it is more likely to be accepted by users. By applying
these into e-commerce context we hypothesize:
Hypothesis 3: Perceived ease of use will have a positive effect on implementation of
e-commerce by Malaysian SMEs.
4.4. Organisational Readiness
The level of organizational readiness has often been identied as a predictor of successful IT adoption (Grandon and Pearson 2002; Thatcher and Foster 2002; Chwelos et al.
2001; Crook and Kumar 1998; Iacovou et al. 1995). Organisational readiness reects a
rms technological capabilities, or the level of use of innovative knowledge and skills
(Dosi 1991). An organisation without such capacity lacks readiness and will be less like380

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ly to adopt innovation. SMEs with insufcient readiness may incur higher initial costs
when implementing innovation (Wang and Tsai 2002). Newcomer and Caudle (1991)
posit that access to adequate equipment in the organization is a major determinant of
the adoption of new technologies. Similarly, Cohen and Levinthal (1990) pointed out
that introduction and implementation of innovation depend on the rms preexisting
knowledge in areas relating to the intended innovation. Thus we propose that:
Hypothesis 4: SMEs at a higher state of readiness are more likely to adopt e-commerce.
4.5. Security
Internet security has been regarded as the key to e-commerce diffusion (Alam et al.
2004; Mukti 2000; Udo 2001; Aldridge et al. 1997; Bauman et al. 1996). A number of
studies (Limthongchai and Speece 2003; Shi and Salesky 1994; Kendall et. al. 2001)
have found that one of major barrier in developing E-commerce is the security of using
E-commerce. To adopt E-commerce information safety it is essential for the company
to have integrity of the entire system (Alam et al. 2004). A study conducted by Beale
(1999) revealed that the reluctance among many consumers to embrace e-commerce is
basically centered on the concerns over security issues and lack of condence in the
current set-up e-commerce.
In addition, a survey of SME E-commerce in 1999, conducted by Price Waterhouse
Coopers, showed that concern about security/privacy is perceived as the third most
important barrier to the use of E-commerce by SMEs. The fear of losing trade secrets
will create reluctance for SMEs to consider entering the E-commerce business arena
(Killikanya 2000). This leads to the fth hypothesis:
Hypothesis 5: SMEs with higher perceived security risks are less likely to adopt
e-commerce.
4.6. Perceived Cost
The cost of adoption is an important factor in the adoption and utilization of the Web
(Ernst and Young 2001). Innovation cost is expected to negatively affect innovation
adoption-the more expensive the innovation, the less likely that it will be adopted by
the organisation (Manseld 1968; Davis 1979). The costs of e-commerce include investment in the process of its adoption (networks, PCs, data storage, demonstration, servers,
software/hardware and other peripheral devices) (Wang and Tsai 2002). Non-interested
business organizations do not adopt e-commerce may think it is not necessary for their
businesses, as it is too expensive to implement at the early stage of e-commerce adoption. The cost factor was studied by various IS researchers (Seyal and Rahim 2006;
Premkumar et al. 1997; Drury and Farhoomad 1996; Cox and Ghoneim 1996) and
found direct and signicant relationship between cost and adoption of technology. The
lower cost of adoption and the higher new innovation such as the e-commerce will be
adopted by the company and vice versa.
Hypothesis 6: SMEs with perceive higher costs in the adoption of e-commerce are less
likely to adopt e-commerce.
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4.7. Managers Characteristics

Adoption of e-commerce is heavily reliant on the acceptance of e-commerce technology
by the business owner (Cloete et al. 2002). It can be summarized from the previous
research that managers characteristics are important factors affecting the adoption and
utilization of the Web. Manager is an entrepreneur gure who is crucial in determining
the innovative attitude of a small business (Rizzoni 1991). From Therefore, managers
characteristics are expected to inuence the adoption of e-commerce (Mirchandani and
Motwani 2001). This is because managers determine the management style of the company. Managers characteristics which include prior experiences, resistance to change,
education level and training are important factors that affect the adoption and utilization
of the Web (Torcchia and Janda 2000; Larsen and Wetherbe 1999; Woodcock and Chen
2000; Nutt 1995; Folger and Sharlicki 1999; Mick and Fournier 1998; Thong and Yap
1996). This leads to the seventh hypothesis:
Hypotheses 7: SMEs with Managers who have more positive attitude towards adoption
of e-commerce are more likely to adopt e-commmerce.

5. Research methodology
An empirical study was designed to test the research framework and the abovementioned hypotheses. We will briey address here some methodological issues related to
the subject (section 5.1) data collection (section 5.2) and the measurement of variables
(sections 5.3).
5.1. Population
The study was concerned with small businesses located in Klang Valley in Malaysia.
The logic behind for choosing this Klang valley area, Klang Valley is the main business
centre in the country and it is on the advantageous edge in this study as it is equipped
with modern facilities, such as fast Internet connections and advanced telecommunications system, compared to other states in Malaysia (Siwar and Kasim 1997). We afford
to get the sampling frame from the Small and Medium Industries Development Corporation (SMIDEC) in which the listed members in the Malaysia were selected from
the list. The target groups were considered based on the number of employees in the
business as it is the most commonly used in management research (Ghobandian and
Gallear 1996; Haksever 1996; Terziovski et al. 1997). In addition, the list also provides
the information on companys location, the contact person and correspondent address
of the companies which was used during the data collection.
5.2. Data collection
As mentioned earlier, the focus of the eld survey was SMEs in Klang Valley, Malaysia. From the sampling frame, only a total of 441 SMEs are listed with SMIDEC were
eligible to be selected as part of research samples. As such, all of them were chosen as
the research samples.
Survey instrument packages consisting of a cover letter, a questionnaire and a stamped
reply envelope were mailed to the 441 companies of the research sample. The contact
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person identied was typically either the owner of the business or a top-level manager
in the organization. Thirty nine envelopes were return either due to an incorrect mailing
address or the organization no longer existed.
Approximately two weeks after the initial mailing, the researchers personally contacted
selected respondents over telephone to request their participation in the survey. In this
process, some respondents agreed to be interviewed personally. A total of 205 completed
questionnaires were received, (a response rate of 46%). However, 5 questionnaires were
discarded due to incomplete responses and nally 200 completed questionnaires were
used for analysis.
A prole of the responding companies is shown in Table 1. The majority of the surveyed
companies are service provider (63%) while 37% are from manufacturing sectors. A
slight majority of the surveyed companies (56%) had been in business for a period of 1
to 2 years. While only 18 companies (9% of the sample) have been in business for less
than 1 year, 35% companies were in business for over ve years. Even though about
62 percent of the respondents indicats some form of Internet applications, more than
Table 1. Demographic Prole and descriptive statistics
Frequency

Percent

Primary activity
Manufacturing
Service

74
126

37
63

Years in business operation

Less than 1 year
1 year to less than 5 years
5 to years less than 10 years
10 years or above

18
112
52
18

9
56
26
9

Respondents Education level

Non graduate
Graduate
Postgraduate

44
130
26

22
65
13

Respondents Ethnic Background

Malay
Chinese
Indian
Others
Total

48
122
24
6
200

24
61
12
3
100

Internet usage
Internet user
Internet non-user

124
76

62
38

Years of Internet usage

Less than 1 year
1 year to less than 5 years
5 to less than 10 years
10 years or above

30
47
37
10

24.19
37.90
29.84
8.07

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S. S. Alam et al. An empirical study of factors affecting electronic commerce adoption among SMEs in Malaysia

37.9 percent of them have been using Internet between 13 years, and only 10 companies have been using Internet for more than 4 years. In fact, only about 29.84 percent
of the responding companies uses the Internet between 3 to less than 4 years
The results indicate that respondents are well educated with over 78% holding undergraduate or postgraduate degrees. The majority of them are Chinese (61%), while only
one-third of the respondents were ethnic Malay (24%) and Indian (12%) managers.
5.3. Measuring instrument
The measurement methods used in this study were drawn from literature on IS and
e-commerce. For all concepts, we asked respondents to rate their level of agreement
with statements using 6-point scales (6 = strongly agree and 1 = strongly disagree). The
measures of relative advantage, compatibility and security were adapted from Alam
et al. (2007). Ease of use was measured using items adapted from Davis TAM model
(Davis 1989). Perceived cost was measured using three-item scale developed by Premkumar et al. (1997). Level of organizational readiness was constructed the study of Iacovou et al. (1995) and Scupola (2003). In this study, respondents were asked to indicate:
To extent an organization feels ready to adopt e-commerce. The four organizational
readiness components are: skill and knowledge of the technology, internal IT support,
nancial resources and external parties such as IT vendors. Three items of Managers
characteristic variable was assessed in this study. The responses were obtained on a
six-point Likert scale, (6 = strongly agree and 1 = strongly disagree). The three items:
interest of the top management, feelings on importance of e-commerce adoption and
encouraging role of top management.
5.4. Test of reliability, validity and identication of factors
The measurement of reliability provides consistency in the measurement of variables. Internal consistency reliability is the most commonly used psychometric measured assessing survey instrument and scales (Zhang et al. 2000). Cronbach alpha is the basic formula for determining the reliability based on internal consistency (Kim and Cha 2002).
The alpha values for relative advantage yields reliability co-efcient of 0.891 as shown
in Table 2. This value far exceeds the minimum standard of 0.7 set by Nunnally (1978).
The value of 0.891 generates a strong indication that there is an internal consistency in
the measurement. Similarly, the ve statements measure for compatibility generates a
Cronbach Alpha value of 0.899, highlighting an internal consistency in the measurement.
The values of alpha obtained for ease of use is 0.885, which suggest that scale is reliable for use in this study. The measures for organizational readiness and security gave
respective Cronbach Alpha values of 0.896 and 0.903 also are being supportive.
The high reliability coefcient for cost (0.832) indicates high internal consistency
among its statements. This is consistent with reports by Nunnally (1978). The three
items of manager characteristics scale, is used to measure the extent of the respondents
perception of their as being supportive. The Cronbach Alpha found in this study is
0.808. Since the Cronbachs alpha values are in between 0.808 to 0.903 and all above
cut off limit, that is 0.7, the constructs are therefore deemed to have adequate reliability.
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5.5. Test for content validity

Content validity represents the adequacy with which a specic domain of content has
been samples, in other words whether instrument is truly a comprehensive measure of
area under study. Its determination is subjective and judgmental (Nunnally 1978). The
questionnaire is based on extensive literature survey and opinions of experts in the
e-commerce area and hence, it demonstrates content validity.
5.6. Test for construct validity: factor analysis
Construct validity represents the extent to which the items in a scale measure the same
construct. Exploratory factor analysis was used in order to identify underlying constructs and investigate relationships among key survey interval-scaled questions regarding intent to adopt e-commerce in the SMEs. Principal axis factoring was carried out,
followed by varimax rotation with Kaiser Normalisation. Varimax rotation facilitated
interpretability. The Kaiser-Mayer Olkin measure of sampling adequacy (KMO) was
rst computed to determine the suitability of using factor analysis.
The factors with eigenvalues of more than 1.0 only have been retained. All factors with
eigenvalues less than 1.0 are considered insignicant and hence dropped. A total of
seven factors with eigenvalues greater than 1.0 were identied. These factors explained
72.23% of the total variance. Under the seven conditions for e-commerce adoption considered in this study, the combined results of factor analysis (Table 2) indicates that most
items loaded properly on their expected factors. However one item of relative loaded
together with compatibility items and it was deleted for further analysis.
Table 2. Results of Factor and Reliability Analysis
Factors with Items Loaded in Each Factor

Relative Advantage
Expand market share and increase the customer base
Will increase companys sales and revenues
Reduce operating procedure
Improve companys image
Will increase the competitive advantage for our
company
Provides easy access to competitors and product
information
Compatibility
Companys traditional operating procedures
Companys current operations/procedures
Existing values
Suppliers and customers ways of doing business
Culture

Factor Eigen-value
Loading of Rotated
Factors

Cronbach
Alpha

16.194

0.899

32.270

0.891

0.747
0.719
0.511
0.740
0.717
0.757

0.726
0.753
0.801
0.697
0.616

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End of Table 2
Factors with Items Loaded in Each Factor

Ease of Use
E-commerce to be exible interact with
E-commerce would be clear and understandable
Ease for me to become skillful at using e-commerce
E-commerce easy to use
Learning to operate EC would be easy
Organisational Readiness
Financial resources to adopt e-commerce
Technological resources to adopt e-commerce
Skill and knowledge
External support
Security
Current laws and regulations are sufcient to protect
e-commerce users Interest
My company does not have condence in the
payment system of e-commerce
My company is concerned that information involved
in a transaction over the Internet is not private
My company lacks condence about the security of
e-commerce transactions
Cost
High set up cost
Additional staff required
Difcult to justify cost and benets
Managerial Characteristics
Interest of the top management,
Feelings on importance of e-commerce adoption
Encouraging role of top management.

Factor Eigen-value
Loading of Rotated
Factors

Cronbach
Alpha

6.568

0.885

3.148

0.808

4.420

0.903

4.225

0.832

5.414

0.896

0.771
0.835
0.654
0.718
0.735

0.474
0.683
0.556
0.539

0.729
0.724
0.615
0.703

0.702
0.675
0.687

0.787
0.766
0.731

Rotation method: Varimax

KMO- .862 Bartletts Test of Sphericity sig. .000

Relative advantage and compatibility items also loaded together in other e-government
and IT adoption research (Carter and Belanger 2003; Karahanna et al. 1999; Moore and
Benbasats 1991) study. Carter and Belanger concluded that it is unlikely that respondents would perceive the various advantages of using [state e-Government services], if its
use were in fact not compatible with the respondents experience or life style.
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6. Results
Data Analysis
The data were analysed using multiple linear regression analysis following the guidelines established by Hair et al. (1998). The purpose of regression analysis is to relate a
dependent variable to a set of independent variables (Mendenhal and Sincich 1993) and
nd out the ability of each independent variable to explain the dependent variable. Multiple Regression analysis is an appropriate analytical technique for the research question
of this study that seeks to nd out the relationship between E-commerce use intention
(dependent variable) and a set of factors such as relative advantage, compatibility, ease
of use, organisational readiness, security, perceived cost, and owner / managers perceptions of E-commerce initiative, (independent variables).
Assumption of multivariate normal distribution, independence of errors, and equality of
variance were rst tested. This study involves a relatively large sample (200 companies)
and therefore, the Central Limit Theorem could be applied and hence there is no question on normality of the data. Two major methods were utilized in order to determine
the presence of multicollinearity among independent variables in this study. These methodologies involved calculation of both a Tolerance test and Variance Ination Factor
(VIF) (Kleinbaum et al. 1988). The results of these analyzes are presented in Table 3.
Multicollinearity was not a concern with this data set as conrmed by the main effect
regression models with variance ination factors (VIF range from 1.390 to 2.767), as
it is well below 10. As can be seen from this data, none of the Tolerance levels is < or
equal to .01. The acceptable Durbin Watson range is between 1.5 and 2.5. In this
analysis Durbin Watson value of 1.722, which is between the acceptable ranges, show
that there were no auto correlation problems in the data used in this research. Thus, the
measures selected for assessing independent variables in this study do not reach levels
indicate of multicollinearity.
In Table 4 the results of the individual hypotheses that were being tested are presented.
The model explained 55 percent of the variance in SMEs adoption of e-commerce
(53 when adjusted for the population). Highly signicant F-value indicates very good
Table 3. Test of Collinearity
Variable

Tolerance

VIF

Composite Relative Advantage

0.573

1.745

Composite Compatibility

0.500

2.002

Composite Ease of Use

0.720

1.390

Composite Organisational Readiness

0.460

2.172

Composite Security

0.361

2.767

Composite Perceived Cost

0.426

2.347

Composite Managers Characteristics

0.536

1.866

387

S. S. Alam et al. An empirical study of factors affecting electronic commerce adoption among SMEs in Malaysia

model t (F = 32.910, p <. 0001). Five of the seven adoption factors relative advantage, compatibility, managers characteristics, organizational readiness and security
were found to be signicant in predicting SMEs intention to adopt e-commerce. Findings are discussed in the section to follow.
Table 4. Multiple Regression Results
Variable

Coefcient

t-value

Sig.

Supported

Constant

1.587

4.085

.000

Relative Advantage

0.123

2.459

.015*

Yes

Compatibility

0.282

3.951

.000**

Yes

Ease of Use

0.017

0.348

.728

No

Organisational Readiness

0.247

3.454

.000**

Yes

Security

0.306

3.902

.000**

Yes

Perceived Cost

0.044

0.585

.559

No

Managers Characteristics

0.266

4.030

.000**

Yes

R2

0.55
Adjusted R2 0.53
F-value (sig. level): 32.91**
Level of signicance of the t-value: *p 0.05; **p .001

7. Discussion
The purpose of this study is to identify the major factors inuencing e-commerce adoption by SMEs in Malaysia. As mentioned earlier, perceive relative advantage, compatibility, managers characteristics, organizational readiness and security were found to
be signicant in predicting SMEs intention to use e-commerce. We discuss the results
in this section with implications for practitioners with respect to what can be done to
improve SMEs perceptions to adopt e-commerce.
7.1. Relative advantage
Multiple regression result indicates that SME managers perceived relative advantage
is a signicant predictor of e-commerce adoption (beta = .123; t-value 2.459 signicant
at p 0.05), which lends support to the rst hypothesis and similar nding reported
in Hoppe et al. (2001). It is expected since past literature has consistently shown that
perceived relative advantage has a signicant and positive inuence on the adoption of
new innovations (Tan and Teo 2000; Holak and Lehmann 1990; Tornatzky and Klein
1982). This nding suggests that when e-commerce is perceived as being better than
the idea it supersedes, and benecial to SMEs, its adoption is more likely. Adoption of
e-commerce benets SMEs overall operating costs, expand market share and increase
customer base, improve public relations to improve image.
The government agencies, such as The Multimedia Development Corporation (MDeC),
Malaysian Communications and Multimedia Commission (MCMC), National Productiv388

Journal of Business Economics and Management, 2011, 12(2): 375399

ity Council (NPC), Small and Medium Industries Development Corporation (SMIDEC)
should identify and communicate to SMEs the advantage of e-commerce as means of
selling, buying, providing customer services, advertising with global customers. As a
result of e-commerce SMEs can sell their product all over the world and customer will
get faster services from them. For example, government agencies could encourage the
adoption of Web Site to sell their products / services by emphasizing its convenience and
speed up compared to brick-and-mortar business. Online sales can be occurs from the
home and ofce 24 hours a day, seven days a week. The selling and customer services
arent limited to standard business hours. The customer can complete this transaction
whenever and from wherever it most convenient. The online sales and buying are also
quicker than the traditional method of business since the customers dont have to visit
the shop existing at far from the customers place. The online services are immediately
available to each customer individually.
7.2. Compatibility
Higher levels of perceived compatibility are associated with increased intentions to
adopt e-commerce in the businesses. Studies like those carried out by Tan and Teo
(2000); Hoppe et al. (2001); Cooper and Zmud (1990); Tornatzky and Klein (1982) have
generally shown that perceived compatibility of an innovation has a positive inuence
on the adoption of the innovation. From the Table 4, regression analysis compatibility
showed signicant inuence over the adoption of e-commerce (beta = 0.282, p-value =
0.001). This research therefore further proves the earlier ndings that showed, Internet
users who feel that using e-commerce is compatible with their working are more inclined to adopt such services.
Many developed countries now embrace Internet technology in their business (Web Site,
E-commerce, and E-business), leisure (Instant messaging and virtual communities) and
health (E-health). Owner / managers and the employee of SMEs have adopted Internet
in their home or ofce is likely to adopt e-commerce in their business as well. Owners/managers who adopted Internet technologies can be expected to view e-commerce
initiatives as compatible with their business. Internet adopters are comfortable searching
for information about product and services, providing personal information and conducting transaction electronically. These business owners / managers will have higher
intentions to use e-commerce than those who view this e-commerce as incompatible
with their business.
7.3. Ease of use
Perceived ease of use are not signicantly associated with increase use intentions of
e-commerce. Negative sign shows that e-commerce is not easy to be use in SMEs in
Malaysia. Previous studies found that complexity has signicant negative effect on ecommerce adoption in the business (Alam et al. 2007; Cheung 1998; Tan and Teo 2000;
Lederer et al. 1999; Cockburn and Wilson 1996). Multiple regression analysis shows
results of ease of use (beta = 0.017, p-value = .728), indicating that complexity have a
negative effect upon e-commerce adoption among SMEs. Most of the previous studies
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S. S. Alam et al. An empirical study of factors affecting electronic commerce adoption among SMEs in Malaysia

suggest that the more complex new technology is perceived to be, the less likely it is
that it will be adopted. One possible reason is that SMEs especially in Malaysia and
other developing countries are still reluctant to use the Electronic Commerce in their
business operation. According to Statistics of SMI (Small and Medium Scale Industries)
Association of Malaysia, only 30 per cent of the SMEs in Malaysia have a web presence
and use IT on a daily basis (Hussin and Noor 2005). Since these SMEs are reluctant
to use e-commerce, apprehension provoked by potential complexity is most signicant
deterrent of e-commerce adoption among SMEs.
7.4. Organisational Readiness
The higher levels of organizational readiness are associated with increased intentions
to adopt e-commerce among SMEs in Malaysia. Multiple regression analysis shows
results of (beta = 0.247, p-value = .001), implying that there is a positive and signicant
correlation between organizational readiness and e-commerce adoption. This research
therefore further proves the earlier ndings that showed observability as having a positive and signicant inuence on e-commerce adoption (Grandon and Pearson 2002;
Thatcher and Foster 2002). Existing Internet connection in the business, knowledge and
skills of owner/manager and employees about online business reects a rms technological capabilities. SMEs without such capacity will be less able to adopt e-commerce
into their rms.
7.5. Perceived security
Higher levels of perceived security are associated with decreased intentions to adopt ecommerce initiative. Studies like those carried out by Alam et al. (2007), Beale (1999)
have generally shown that concern about security is perceived as the most important
barrier to the use of e-commerce by businesses. The results of this research show that
when owner or manager of SMEs is fear about security the degree of e-commerce adoption is lower. Regression analysis shows results of security (beta = 0.306, p-value =
.001), indicating that lack of security have a negative effect upon e-commerce adoption
among SMEs in Malaysia. The fear of losing trade secrets will create reluctance for
SMEs to consider entering the E-commerce business arena (Killikanya 2000). All of the
previous studies suggested that perceived security/condentiality was also found to be
negatively associated with the adoption since it is a major impediment to the adoption
of e-commerce.
7.6. Perceived cost
Although the ndings show that perceived cost has a positive relationship with e-commerce adoption intentions, this relationship is not signicant (beta = 0.044, p-value =
.559). One possible reason is that recently, there has been a dramatic increase in the
number of business solutions companies in Malaysia, due to the promotion of e-commerce by the government through Multimedia Super Corridor (MSC). It has led to
high competition in the markets, whereby companies provide many special services
to attract customers with less cost. Customers have many options provided by those
companies and user can choose what they want: including access to a free trial, trying
390

Journal of Business Economics and Management, 2011, 12(2): 375399

various applications before making a decision, implementation at a certain scale, low

start-up cost or ability to get out anytime. Even in Malaysia many government agencies
also providing lot of support and subsidies to increase usage of IT in the business these
conditions can consequently lead to an unimportance of perceived cost of e-commerce
adoption by SMEs.
7.7. Managers characteristics
The managers play important roles in the adoption and utilization of the e-commerce
among SMEs. Regression analysis showed managers characteristics having (beta =
0.266, p-value = .0001) indicating that managers who posses computer skills will adopt
the Web at a faster rate. This suggests that managers with hands and experience are able
to inuence the adoption rate of the Web. This is consistent with the study done by Torcchia and Janda (2000) in which they concluded that managers with prior experience in
computing and hands on experience inuence the adoption of Web.
Managers who have been using the Web for some time are able to know the advantages
and disadvantages of the Web. Consequently, the managers are able to use the information of the Web effectively expressed comfort with the Web. This is consistent with the
studies had done by Torcchia and Janda (2000) and Larsen and Whetherbe (1999), in
which researchers concluded that computer skills and Internet usage in job by managers
might increase the efciency and effectiveness of adoption and utilization of the Web.
Therefore, hypothesis 2 is accepted. This further conrmed the consolation made by
Thong and Yap (1996) that manager is the main decision-maker of the company and he
has the power to determine the adoption of new technology.

8. Limitations and Future Directions

Like other empirical studies, this study is not without its limitations. Our sample consisted of SMEs in Klang Valley in Malaysia may limit the generalizability of the results. Although several e-commerce adoption studies focused on the zone basis (Van
Beveren and Thomson 2002), state based respondents, such as experience using technology, differ from state to state from overall population of SMEs. The sample size
itself is relatively small. The study can be strengthened by increasing the sample size
and including participants in other geographical areas. With an increased sample size,
a more detailed empirical analysis among the independent variables and the variables
that have multiple categories can be performed. Potential correlations between some of
the independent variables (e.g. gender, race, education level of the manager) need to be
reported in future study.

9. Implications
9.1. Implications for research
This study presents an introductory research that explains 53 percent of the variance
in SMEs adoption of e-commerce. This research can serve as a starting point for other
e-commerce adoption research, while encouraging further exploration and integration
addition adoption constructs. Future research needs to focus on a larger cross section
391

S. S. Alam et al. An empirical study of factors affecting electronic commerce adoption among SMEs in Malaysia

and more diversied random samples to verify the ndings of the current study. Moreover, to further clarity of the factor inuence on e-commerce adoption in the businesses,
other model could be used. Future inquiries could also examine the causal relationships between factors and SMEs perceive overall e-commerce adoption by employing
a structural equation modeling technique. In addition, future research needs to examine
business-to-business purchase in the context of cross-national differences.
9.2. Implications for practice
The study reveals ve signicant indicators of SMEs intention to adopt e-commerce in
their business. Government agencies like MCMC, MDeC, SMIDEC, and other government agencies should create better awareness of the benets of e-commerce to encourage higher rate of adoption. It can be done by having seminars or induction sessions
to allow SMEs to evaluate their new inventions. In order to receive greater responses
towards e-commerce adoption, it is recommended that authority should give certicate
as a token and nancial support to attend the seminar. They could establish a close link
with all SMEs and get continuous feedback from them in order to identify the problem
areas and take necessary actions to rectify them. Another way to enhance the possibility
to use e-commerce in the SMEs sectors, government should enforce standardized, consistent and uniform policies in all SMEs sectors, agencies or subsidiaries in implementing e-commerce system. As it is found in this study, respondents mentioned e-commerce
is a complex system, and the system should be made as user-friendly as possible as
not all users are familiar with computers and the Internet, especially the old SMEs.
Providing online help and giving end users the choice of their preferred language will
ease of their usage. Management of SMEs should provide adequate pre-training to their
employees on how to use e-commerce systems in business at all levels must be ensured
so that the employees should get comfortable with its use. Security of information must
be ensured with the help of the restricted access level of passwords.

10. Conclusion
The purpose of this study is to investigate factors affecting intention to adopt e-commerce in the SMEs in Malaysia. This study also contributes to and extends our understanding of the Internet as a medium for commercial use in the manufacturing arena,
identifying the rationales for adopting or rejecting the Internet based e-commerce by
the SMEs. From a managerial viewpoint, the ndings provide support for investment
decisions, and for decisions relating to the development Internet services that address
and take the concerns and needs of companies into consideration.
The research was done under theoretical framework that was developed based on the
previous study. The multiple regression analysis shows that relative advantage, compatibility, organizational readiness, managers characteristics and security are signicant
elements of e-commerce adoption. The model explains 53 percent of the variance in
SMEs intention to adopt e-commerce. As Malaysian government grows in importance
and priority for business worldwide, an understanding of the factors that inuence SMEs
adoption of the e-commerce is invaluable.
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Despite some limitations, this research makes some notable contributions. First, we
review existing literature in this area and develop a theoretical framework and also
identify both and absolute and relative view of the gap. Second, we provide an analysis
of the state of the factors driving it that owes its foundation to existing research and
extends, thus unifying and advancing the eld of knowledge. Finally, we examine the
factors contributing to e-commerce adoption and are unique in the research to date.

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VEIKSNI, TURINI TAKOS ELEKTORINEI PREKYBAI, STUDIJA:

MALAIZIJOS PAVYZDYS
S. S. Alam, M. Y. Ali, M. F. M. Jani
Santrauka
iame straipsnyje pristatomas empirinis tyrimas, kuriame analizuojamas e.-komercijos princip taikymas Malaizijos smulkiojo ir vidutinio verslo monse. Tyrimo modelis pristatytas iame straipsnyje,
buvo sudarytas remiantis mokslins literatros analize. Autoriai ikl 7 hipotezes, kurias vliau band
pagrsti. Ikeltoms hipotezms patvirtinti (arba paneigti) buvo atliekamas tyrimas. Tyrime dalyvavo
200 smulkiojo ir vidutinio verslo moni, taikani savo veikloje e.-komercijos principus. Pristatyto
tyrimo metu buvo nustatyta ir tai, kad skmingam e-komercijos princip taikymui didel reikm turi
ne tik technologiniai sprendimai, bet ir mogikasis veiksnys. Autoriai paymi, kad is tyrimas yra labai
svarbus Malaizijoje sikrusioms smulkiojo ir vidutinio verslo monms, nes jame buvo vertinamos
tarptautinio verslo perspektyvos globalizacijos kontekste.
Reikminiai odiai: e.-komercija, smulkusis ir vidutinis verslas, santykinis pranaumas, Malaizija.
Syed Shah ALAM is a senior lecturer at the Faculty of Economics and Business, Universiti Kebangsaan Malaysia (National University of Malaysia). Prior to joining to the National University of
Malaysia in June 2009, he taught at Universiti Teknologi MARA (UiTM) Malaysia and Multimedia
University Malaysia (MMU). Dr Alam also served MMU as a coordinator of postgraduate program
at the same time. He has authored few books on E-Commerce, Internet marketing and more than 30
academic and professional articles in the reputed journals and international conferences. His research
work involves the development of E-commerce in the business eld. He has been awarded the Joint
Conference of e-Commerce, e-Administration, e-Society, and e-Education best paper award in 2008.
His future research will focus on Internet marketing, E-commerce, mobile E-commerce, Internet and
Mobile adver.
Md. Yunus ALI is a Senior Lecturer of Marketing in the School of Business, Monash University
Sunway Campus, Malaysia. Previously Dr. Ali taught at Monash University, Queensland University
of Technology, University of Wollongong in Australia, and the University of Rajshahi in Bangladesh.
He has published in international journals including Journal of World Business, Asia Pacic Journal of
Management, Asia Pacic Journal of Marketing and Logistics, Journal of Management and Organization. His areas of research interest include international joint venture, strategic alliance, e-marketing,
export marketing, exporter-importer relationship, internationalization of small and medium-sized enterprises, and buyer behavior.
Mohd. Fauzi Mohd. JANI is Dean at the Faculty of Economics and Business, National University of
Malaysia. He earned his Doctorate degree from Washington State University USA. He has more than
25 years experience in teaching, research and administration. His articles on agriculture, SMEs have
published in many leading journals. He has written books in his area of specialization and has presented many papers on economics and SMEs in international conferences. His teaching and research
interest are Agricultural Marketing, Commodity Analysis, and Environmental Impact Assessment. He
can be reached through his e-mail: mdfau2113@yahoo.com.

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